On April 2, President Donald Trump announced one of the largest tax hikes in modern times. Pointing to a long list of “reciprocal tariffs” — in reality, new taxes based entirely on differences between imports and exports, irrespective of cause — he proclaimed it “Liberation Day” for the American economy.
A week later, having managed to “liberate” trillions of dollars in wealth from panicked investors, Trump made another announcement: most of the new taxes would be paused for 90 days. The president retained 145% tariffs on Chinese imports, preexisting tax increases on Mexican and Canadian goods, and a 10% tariff on all other imports.
Economic crisis averted? Hardly. Even during this three-month grace period, the United States will tax imports at the highest level in generations. The administration is also promising selective escalations and carveouts. Not surprisingly, businesses, investors, and consumers are wary.
Jamie Dimon, CEO of JPMorgan Chase, told The Wall Street Journal that today’s market dynamics have no recent parallel. “It’s a significant change we’ve never seen in our lives.”
The resulting uncertainty “has been damaging on its own,” a California custom-bike manufacturer told The Washington Post. “My orders have certainly slowed. Why would someone in Japan or Australia or Canada order an American bike if things could change dramatically again next week? It’s like everything is frozen.”
In economics, the terms “risk” and “uncertainty” aren’t synonymous. Risk is calculable based on historical patterns. Uncertainty isn’t. The former is about known unknowns, the latter unknown unknowns.
The idea that policy uncertainty itself, as distinguished from the implementation of bad policy, can act as a damper on economic growth is nothing new. More than a decade ago, a trio of scholars — Northwestern University’s Scott Baker and Stanford’s Nick Bloom and Steven Davis — released the first in a series of papers that used patterns in news reporting about politics and business to measure policy uncertainty and then to link it to economic performance.
Over the decades, they found, increases in policy uncertainty in the US were followed by “declines in investment, output, and employment.” Nor is the phenomenon an example of American exceptionalism. “Our results suggest that elevated policy uncertainty in many countries around the world contributes to sluggish growth in recent years,” they wrote.
According to their latest data, policy uncertainty in America is higher than it’s been in four decades. As of mid-April, the authors’ Economic Policy Uncertainty Index stood at 1,038, up from 123 after the November election. Even at the peaks of the Great Recession (626) and the COVID pandemic (557), policy uncertainty by this measure was lower than it is now.
At the level of state and local government, too, the prospect of unsteady hands at the tillermakes some economic actors seek safer returns elsewhere. A 2016 paper in the Journal of Monetary Economics found that states exhibiting more policy uncertainty tended to post higher unemployment rates during the Great Recession.
A follow-up study in 2019 suggested that where the trajectory of state taxes on corporate income is unclear, there are fewer business starts and expansions in that state. “Uncertainties about tax policies, even if the tax eventually does not change, can negatively influence business activities,” wrote Singapore National University scholars Jungho Lee and Jianhuan Xu in the Journal of Economic Dynamics and Control.
Here in North Carolina, one reason our economy has outperformed that of most of our peers is that fiscal and regulatory policies are clear and predictable. The General Assembly caps annual spending growth at a combination of inflation and population growth and typically adopts tax changes in phases. We also use formulas to guide decisions on such matters as incentive grants and transportation spending, rather than entrusting too much power to individual policymakers.
Washington should follow North Carolina’s lead and swiftly reduce what it is, in effect, an “uncertainty tax” on American households, businesses, and investors. First step: Restore to Congress its constitutional power to set tax rates, including tariffs.
John Hood is a John Locke Foundation board member. His books Mountain Folk, Forest Folk, and Water Folk combine epic fantasy and American history.
